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When a firm is making a loss, it will have to decide whether to continue production or not. This
decision will, in fact, depend on the different total costs levels and whether the firm is operating
in the short run or in the long run.
If the firm is in the short run, and is making a loss whereby:
it is advisable for the firm to continue production. If it fails to achieve these conditions, it is
advised to close down so that the only costs the firm will have to pay will be the fixed costs.
Even if the firm stops producing, it will have to continue to meet the level of fixed costs. Since
whether the firm produces or not, it will have to pay fixed costs, it is better for it to continue
production in an attempt to decrease total costs and increase total revenue, thus making profits.
This can be done by:
In the long run, the condition to continue producing requires the price P to be higher than the
ATC, i.e. the line representing market price should be above the minimum point of the ATC
curve.
If P is equal to ATC, the firm is indifferent between shutting down and continuing to produce.
This case is different from the short run shut down case because in long run there's no longer a
fixed cost (everything is variable).